M&S: one step back is two steps forward

Marks & Spencer called it "an improved sales performance", but that's not quite right. Quarterly like-for-like sales were down 4.2%. That is an improvement only in the sense that the rate of deterioration has slowed. Most people would call that a step backwards, not forwards.

Still, it wasn't two steps backwards, which was what investors feared. But, frankly, the City was fooling itself if it thought Rose couldn't put up a fight. M&S's response comes straight from the textbook: it has accepted a hit to profit margins and increased promotional activity, such as "dine in for a tenner".

The strategy is perfectly respectable but M&S has stepped on to a treadmill that no mass-market retailer would wish to stay on for long. The damage will be seen in May, when the group will report a slump in profits from £1bn to £600m. At that point, the questions for Rose will become harder. The debate will shift from sales comparisons to bread-and-butter matters such as the dividend. Can the payment be maintained?

Probably not, on yesterday's evidence. It is nice to know customers are "responding positively" to keener prices (it would be odd if they weren't) but Rose's most telling comment was that he sees no signs of improvement in the economy. If that is still his view in two months, it is hard to see how M&S can avoid chopping a dividend that was raised by 23% last year. VAT will be going up in 2009 while 2010 will be the year in which M&S's clothing buyers in the far east will feel the drag of the devalued pound. If consumer spending is still in the doldrums, M&S's profits will still be heading south.

It's not as if M&S can seek salvation by pinching customers from Top Shop or Primark. It is stuck with the customers it's got. They tend to be savers rather than borrowers, viewing 0.5% interest rates as a burden, not a blessing. That's a sizeable obstacle since the view of M&S shareholders is probably this: they'll suffer a lower dividend in silence, but they want to see Rose achieve proper sales gains by the end of this year.

Cairn-do attitude

It's safe to assume that no FTSE 100 company has ever before included a slide on "iceberg management" in its results presentation, but welcome to Cairn Energy's latest adventure - oil and gas exploration off the coast of Greenland. If the environmental risks sound frightening, so do the financial ones. Drilling a single test hole in Greenland's water will cost up to $100m. How many holes will be needed? Nobody knows until the drilling starts - that's how oil exploration works.

You might expect Cairn's shareholders to be alarmed by the size of the potential bets. In fact, the reverse is more likely. If necessary, Cairn will probably find willing partners to join its Arctic and sub-Arctic adventure. Big finds in non-Opec territories are what everybody wants and Greenland, according to the early seismic charts, could be very big indeed. Cairn also has a good reputation. It bought Shell's unloved interests in the Rajasthan desert and discovered reserves that will be producing 80,000 barrels by the end of this year.

The Rajasthan find was not Cairn's first big discovery, as lauded investor Anthony Bolton reminds us in his latest book, Investing Against the Tide. The first "company maker" field was in Bangladesh. Bolton calls Cairn a company with an asymmetric pay-off - you make a lot of money if things go well, but don't lose much if they don't.

Bolton timed his punts on Cairn to perfection - he caught both big moves. It's not known whether he's backing the Greenland bet since he's not managing money directly for Fidelity these days - but Fidelity itself is on the register.

Nobody knows if Greenland's oil, if it's there, can be produced economically. At the current oil price of $48 a barrel, nobody will be making much money. The assumption is that, eventually, the price will rebound to $75-ish. There's an awful lot of "ifs" in the story, but that's how Cairn plays.

Make votes count

UKFI, the body that manages our stakes in banks, is to vote against Royal Bank of Scotland's remuneration report - the one that details Sir Fred Goodwin's pension. It's an empty gesture, of course, since votes on remuneration are merely advisory. But maybe it's time to give these votes some meaning, at least on directors' discretionary bonuses.

A company with a December year-end would detail proposed bonuses in its March annual report. Shareholders would then approve them, or not, at April's annual meeting. Directors would have an incentive not to play the system. Investors couldn't grumble about the wool being pulled over their eyes.